TradeTheNews.com Weekly
Market Update: Swiss Mess
Fri, 16 Jan 2015 16:08 PM EST
The Swiss National Bank roiled global markets this week by unceremoniously
removing the 1.2000 floor put under the EUR/CHF cross back in 2011, prompting
the franc to gain as much as 35% versus the euro on Thursday. Social media
christened the move "Francogeddon" and the CEO of Swatch called it a
tsunami. SNB Chief Jordan said his strategy was to "take markets by
surprise," and he succeeded. The SNB move was widely taken as another
confirmation that the ECB will move on its QE program next week. Just 24-hours
earlier the EU's highest court gave the ECB a green light to proceed with QE,
even as December euro zone CPI data showed most member states in negative
inflation. Front-month WTI and Brent crude reached parity on Tuesday for the
first time since the summer of 2013, as both February contracts traded below
$46, but prices regained some ground later in the week. In the US, December
inflation readings slipped lower, giving the doves on the Fed ammunition for
their arguments that rate hikes can wait. Note that the yield on the 10-year
UST has contracted nearly every session in January, and traded as low as 1.70%
after the SNB's move on Thursday. Gold rallied pushing the futures back above
the 200-day moving average for the first time since late summer. For the week,
the DJIA fell 1.3%, the S&P500 dipped 1.2% and the Nasdaq lost 1.5%.
Eleven out of 18 euro zone nations reported negative inflation rates for the
month of December, while total Eurozone CPI in December was -0.2% y/y, at its
lowest rate since September 2009. The biggest downward impacts in the reports
were from fuel prices, clearly demonstrating the impact of the oil meltdown.
ECB's Coeure responded to the data by saying the euro zone is still not in
deflation but the risk of deflation has worsened.
With inflation on a slippery slope, few doubt that the ECB QE is right around
the corner (the SNB least of all). On Wednesday, the European Court of Justice
handed down a non-binding opinion that the 2012 OMT bond-buying blueprint did
not break EU law. Anti-QE German hawks had brought the case, hoping to
forestall what they saw was bad policy. Not surprisingly, Bundesbank Chief
Weidmann claimed the court's opinion also showed that there were legal limits
on the ECB, citing commentary in the opinion that said the ECB's activities
need safeguards to prevent violations of the prohibition against direct
financing of governments. By Friday reports were suggesting Draghi presented
Merkel and her staff a plan for QE that they could live with which will be
centered on national central banks purchasing their own countries bonds.
US rates saw a wild week of trading as events in Europe and Asia, softer US
economic data along with sliding commodity prices kept downward pressure on
inflation expectations. The 5-year forward breakeven rate fell to its lowest
level since 1999 and the 5-year TIPS breakeven fell below 1.2% after surprise
central bank moves overseas. The US 10-year yield plunged through the October
low to trade as low as 1.70% at one point, down close to 30 basis points on the
week. Short rates fell also, leading traders to bid up Fed fund futures
contracts, pushing out rate hike expectations modestly towards Q3 2015.
The strength of the US holiday shopping season is still in doubt after
disappointing retail sales data for December. The Advance Retail Sales reading
on Wednesday was a worse than expected -0.9% m/m, and still disappointed after
removing the volatile auto sales segment. Meanwhile, shares of Best Buy and
Tiffany both fell hard, after the electronics retailer said holiday sales fell
slightly y/y while the jeweler cut its FY15 forecast citing headwinds from the
strong dollar.
The Q4 earnings reporting season kicked off with Alcoa's numbers on Monday
afternoon. Alcoa's earnings were better than expected on decent automotive
demand, higher aluminum prices and lower energy costs, although its FY15 global
aluminum demand growth forecast was in line with FY14's +7% y/y estimate, and
it warned of a possible decline in commercial transport production in FY15.
JP Morgan, Bank of America, and Citibank all missed expectations and saw both
earnings and revenue slip lower y/y in fourth-quarter earnings reports. Results
from the three banks were weighed down by charges, civil penalties, and
slumping revenue from trading. JP Morgan's fixed income trading revenue fell
23% y/y, the worst performance of the bunch. Goldman Sachs managed to beat
earnings expectations, but its earnings and revenue also fell y/y, and its
trading unit saw revenue drop 29% y/y in the quarter.
Copper prices slumped to a five year low midweek, with the front-month Comex
contract dropping as low as $2.42 a pound. Traders blamed the slide on the
World Bank citing the possibility of a "disorderly slowdown" in China
as a key factor behind its decision to lower its global growth outlook for 2015
(China accounts for nearly 40% of demand for copper). The big mining names were
hit hard, with Glencore down more than 14% and Anglo American off about 10% on
Monday and Tuesday.
Data continues to reflect China's gradual economic slowdown, adding to the case
for additional PBoC action in the first half of 2015. The China December trade
surplus was in line with estimates, but imports fell again, evidence of soft
domestic consumption. China's Customs Bureau also remarked that for the entire
2014, trade growth would be just 3.4% - well below the official 7.5% target -
and weak conditions could persist in Q1. Foreign direct investment for all of
2014 rose just 1.7%, the slowest rate since 2012. Chinese banks issued 697.3
billion yuan of new loans in December, well below the 800 billion yuan
forecasted. Perhaps the most telling was China's 2014 power consumption which
is one of Premier Li' favored economic indicators, as its growth slowed to just
3.8% from 7.5% in 2013. The latest economic developments prompted Beijing to
add to targeted stimulus, with the PBoC offering 50 billion yuan ($8.1B) in
discounted credit to banks to support loans for farmers and small businesses.
In Japan, the Nikkei225 index hit a ten week low, falling 1.9% on the week as
global risk aversion zapped yen-funded carry flows. The BOJ will meet next week
and offer an update on its CPI and GDP projections, and some Japan-watchers are
speculating that the inflation outlook might be revised lower due to plummeting
oil prices. After an outsized policy response in October, new large measures
are not likely to come any time soon, however there was some chatter that the
BOJ would consider an extension to the program that provides low-interest loans
for financial institutions to encourage even more lending.
